This report provides an investment analysis and portfolio management of A2 Milk Company and JB HI FI limited. It includes ratio analysis, strategic analysis, trade war effect, and ethical behavior of professional fund managers.
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Running Head: Investment Analysis and Portfolio Management 1 Project Report:Investment Analysis and Portfolio Management
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Investment Analysis and Portfolio Management 2 Contents Introduction.......................................................................................................................3 Ratio analysis....................................................................................................................3 JB HI FI limited............................................................................................................3 A2 MILK COMPANY.................................................................................................6 Strategic analysis and business description......................................................................8 JB HI FI........................................................................................................................8 A2 Milk Company limited............................................................................................9 Trade war effect..............................................................................................................10 Retail industry of Australia.........................................................................................10 Food, Beverage & Tobacco of Australia....................................................................10 Ethical behavior of professional fund managers............................................................11 Recommendation and conclusion...................................................................................11 References.......................................................................................................................13 Appendix.........................................................................................................................15
Investment Analysis and Portfolio Management 3 Introduction: A shareholder and investors are the main stakeholders of the business. They invest their amount in the business in order to get return from the business and the business uses those funds to invest into new project to get higher return from the business. It is crucial for a business to maintain a better investment level so that the investors could attracted towards the business to invest the fund and get higher return from the business. Each investors evaluate the financial and non financial performance of a business before invest their funds in the business (Ackert and Deaves, 2009). If the overall performance of the business is attractive and the returns are also higher than only an investors invest into the business. Investment analysis is a process which measures all the financial and non financial factors of the business in order to evaluate the overall performance of the business on the perception of the investors. It takes the concern on various aspects of the business such as the strategically performance, changes into the financial operations and performance, impact of external; factors on the economical position etc. The report has been prepared on the A2 Milk Company limited and JB HI FI. The financial position of both the companies have been evaluated through applying the ratio analysis approach and for evaluating the non financial performance of the business, strategic analysis have been done on the business. As well as, the economical performance of the industry has been measured after the trade war initiate and the ethical behaviour of professional fund managers have also been measured to reach over a conclusion about the stock performance and buy or sell option of the business. Ratio analysis: Ratio analysis is a financial approach which is used by the business and the investors to identify the financial performance and forecast the future financial performance of the business. Ratio analysis focuses on various important figures from the final financial statements of the business to reach over a conclusion about the profitability, liquidity, efficiency, gearing and investment level of the business (Bhimani, Horngren, Datar and Foster, 2008). The ratio analysis study on A2 Milk Company limited and JB HI FI are as follows: JB HI FI limited:
Investment Analysis and Portfolio Management 4 The ratio of JB HI FI limited has been studied firstly to identify the overall financial position of the business. The ratio analysis study of the company is as follows: Profitability ratio: Profitability ratios are the financial equation which helps the investors to identify the profit making ability of the business. The profitability analysis of JB HI FI limited is as follows: Return on assets: Return on assets brief total profit against the available resources of the business. It brief 9.36% return on assets in 2018 which has been improved from last year. The level is quite competitive. Return on equity: Return on equity brief total profit against the available equity of the business. It brief 24.6% return on equity in 2018 which has been improved from last year. The level is quite competitive and brief better position of the business (Yahoo finance, 2018). Gross profit margin: Gross profit margin briefs total profit after the cost of sales against the total turnover. It brief 21.4% gross profit in 2018 which has been improved from last year. The overall profitability level of the business is quite better. Efficiency ratio: Efficiency ratios are the financial equation which helps the investors to identify the efficient power of business and the management of working capital and cash conversion cycle. The efficiency analysis of JB HI FI limited is as follows: Inventory turnover days: Inventory turnover days brief total time which would be required to replace the old inventory through new one. It brief 60.41 days in 2018 to replace the inventory which has been reduced from last year. The level briefs better efficiency level of the business. Receivable turnover days:
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Investment Analysis and Portfolio Management 5 Receivable turnover days brief total time in which the debtors would pay the debt amount to the company. It brief 10.90 days in 2018 to replace the inventory which has been reduced from last year. The level briefs better efficiency level of the business and better cash conversion cycle of the business. Liquidity ratio: Liquidity ratios are the financial equation which helps the investors to identify the current debt level against the current assets and quick assets of the business (Hansen, Mowen and Madison, 2010). The liquidity analysis of JB HI FI limited is as follows: Current ratio: Current ratio briefs the total debt payment capability against the total current assets of the business. The liquidity level of the business has been reduced and brief better position of the business. Quick ratio: Quick ratio briefs the total debt payment capability against the total quick assets of the business. The quick level is lower and briefs the company to improve quick assets (Yahoo finance, 2018). The liquidity position of the business briefs average position of the business. Changes into the quick assets would improve the overall position of the business. Gearing ratio: Gearing ratios are the financial equation which helps the investors to identify the capital structure and gearing position of the business. The gearing analysis of JB HI FI limited is as follows: Debt to asset ratio: Debt to asset ratio of the business explains total debt level against the total resources of the business. The debt to asset level of JB HI FI has been reduced which lead to higher cost of capital of the business. Asset turnover ratio:
Investment Analysis and Portfolio Management 6 Asset turnover ratio of the business explains total debts against the available resources of the business. The asset turnover level of JB HI FI has been improved which brief better position of the company. Investment and market ratio: Investment ratios are the financial equation which helps the investors to identify the investment level of the business through measuring the market performance. The investment analysis of JB HI FI limited is as follows: Earnings per share: Earnings per share of the company explain the total income of each shareholder of the business. The EPS level has been improved in last 3 years to 2.031 in 2018 (Kinsky, 2011). Price earnings ratio: Price earnings ratio of the company explains the total price against the earnings of the company. The PE level has been improved in last 3 years to 1.33 in 2018. It explains that the investment level of the business is quite impressive and attracts the investors to invest into the company for higher returns. A2 MILK COMPANY: The ratio of A2 MILK COMPANY limited has been studied further to identify the overall financial position of the business. The ratio analysis study of the company is as follows: Profitability ratio: The profitability analysis of A2 MILK COMPANY limited is as follows: Return on assets: It brief 27.08% return on assets in 2018 which has been improved from last year at great level. The level is quite competitive. Return on equity: Return on equity brief 35.2% return on equity in 2018 which has been improved from last 2 years (Yahoo Finance, 2018). The level is quite competitive and brief better position of the business.
Investment Analysis and Portfolio Management 7 Gross profit margin: Gross profit margin briefs 50.3% gross profit in 2018 which has been improved from last year. The overall profitability level of the business is quite better and it briefs better position than JBH. Efficiency ratio: The efficiency analysis of A2 MILK COMPANY limited is as follows: Inventory turnover days: Inventory turnover days brief 51.08 days in 2018 to replace the inventory which has been improved from last year. The level briefs reduction in efficiency level of the business. Receivable turnover days: Receivable turnover days briefs 23.68 days in 2018 to get the debt amount which has been reduced from last year. The level briefs average efficiency level of the business and average cash conversion cycle of the business. Liquidity ratio: The liquidity analysis of A2 MILK COMPANY limited is as follows: Current ratio: The current liquidity level of the business has been improved to 3.03 days and brief higher working capital requirement of the business. Quick ratio: Quick ratio briefs the improved level and briefs the company could reduce the assets level to manage the cost. The liquidity position of the business briefs average position of the business. Changes into the quick assets would improve the overall position of the business. Gearing ratio: The gearing analysis of A2 MILK COMPANY limited is as follows:
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Investment Analysis and Portfolio Management 8 Debt to asset ratio: The debt to asset level of A2 MILK COMPANY has been reduced which lead to higher cost of capital of the business (Kaplan and Atkinson, 2015). Asset turnover ratio: The asset turnover level of A2 MILK COMPANY has been lowered which brief reduction in the overall gearing level of the company. Investment and market ratio: The investment analysis of A2 MILK COMPANY limited is as follows: Earnings per share: Earnings per share of the company explain the total income of each shareholder of the business. The EPS level has been improved in last 3 years to 0.25 in 2018. Price earnings ratio: Price earnings ratio of the company explains the total price against the earnings of the company. The PE level has been lowered in last 3 years to 46.87 in 2018. It explains that the investment level of the business is quite impressive and attracts the investors to invest into the company for higher returns. Strategic analysis and business description: JB HI FI: JB HI FI is a retail sector’s firm in Australian market. The company has diversified its market through introducing various new products and technologies in the market to improve the overall performance of the business. The company is one of the leading firms in the industry and the diversification and other strategies of the company explain about better improvement in the overall performance of the business. The strategic analysis on the JB HI FI limited in the industry through applying the factors of porter’s 5 forces model which are as follows: Threat from the substitute products:
Investment Analysis and Portfolio Management 9 JB HI FI limited is offering the electronic and retail consumer products to the Australian market. The various other firms in the industry are offering the same product. Thus the threat from substitute product is higher in the market. Threat from the new entry: JB HI FI limited’s threat level is higher in terms of new entry as it is easier for new firms to enter into the market. The business is required to set new policies to reduce the threat level. Competition with other firms: JB HI FI limited is the leader in the consumer products retail sector in the Australian market. However, there is huge competition in the industry (Horngren, 2009). Bargaining power of suppliers: JB HI FI limited’s bargaining power of suppliers is higher because the suppliers of the company are offering quality product and the numbers are also less (Jiashu, 2009). Bargaining power of buyers: JB HI FI limited’s bargaining power of buyers is lower because the company is offering quality product and the technology is also competitive. A2 Milk Company limited: A2 Milk Company is a Food, Beverage & Tobacco sector’s firm in Australian market. The company has diversified its market through introducing new products and technologies in the market to improve the overall performance of the business. The company is one of the leading firms in the industry and the net revenue of the company explains about better improvement in the overall performance of the business. The strategic analysis on the A2 Milk Company limited in the industry through applying the factors of porter’s 5 forces model which are as follows: Threat from the substitute products: A2 Milk Company limited is offering the dairy products to the Australian market. The various other firms in the industry are offering the same product. Though, the protein factor of the company is attractive which reduces the threat level.
Investment Analysis and Portfolio Management 10 Threat from the new entry: A2 Milk Company limited’s threat level is higher in terms of new entry as it is easier for new firms to enter into the market. The business is required to set new technologies and factors to reduce the threat level. Competition with other firms: A2 Milk Company limited is the leader in the Food, Beverage & Tobacco sector in the Australian market. Thus the competition among the companies is lower and threat level is also reduced (Garrison, Noreen, Brewer and McGowan, 2010). Bargaining power of suppliers: A2 Milk Company limited’s threat level in terms of supplier’s bargaining power is higher because the suppliers are vary less in numbers. Bargaining power of buyers: A2 Milk Company limited’s threat level in terms of buyers are quite lower because the products of the company are enough competitive and the brand loyalty is also higher in the market. The strategic analysis on both the companies lead to the discussion that the strategies of both the companies are quite competitive. It helps the business from any sudden changes into the industry. Trade war effect: The trade war of Australian market has been studied and it has been found that the US new trade policies have impacted on the Australian trade market at huge level. Some of the industries of Australian market have already started affecting because of the trade war (CNBC, 2018). The main affected industries are retail Australian industry and banking industry of Australia. The industry wise impact of trade war is as follows: Retail industry of Australia: The trade war has impacted at huge on retail industry, the Australian retailer depict that they have started facing reduction in their total turnover. The export level has also been affected and due to which the revenue of the companies have been lowered (Reuters, 2018). The china market trade policies of trump have covered the Australian retail industry as well
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Investment Analysis and Portfolio Management 11 and it leads to the downward of the Australian economical position. However, if the individual firms are taken into the concern than the few firms have overcome these issues because of better strategically performance and good provisional system of the business. Food, Beverage & Tobacco of Australia: The trade war impact on Food, Beverage & Tobacco industry has been also been studied. The Australian firms in the Food, Beverage & Tobacco depict that no huge impact have been seen on the total turnover and the revenue of the business. The export level has been affected a bit as the few ways of the country has been blocked. However, the industry is mainly performing in the Australian market and New Zealand market (SMH, 2018). So, the trump policies have failed to impact on the industry. However, if the individual firm, A2 milk company limited is taken into the concern than the firm has overcome these issues because of better strategically performance and good provisional system of the business. Ethical behavior of professional fund managers: Ethical behaviour and the professionalism are key terms which are required to be followed by each of the professional while doing their job. The ethical approach is the factor which helps the fund managers to maintain the dignity and the performance in the industry. In recent times, it has been studied that the professionals are not focusing on their work ethically and for their interest, they are getting involved into various unethical work which lead to the business towards a huge financial scandal (Dent and Whitehead, 2013). A manager is required to understand the fact that the ethical approaches have been made to maintain the level of professionalism in the industry, If the policies would be followed by the business at better level than it would help the professional as well as the industry to maintain the trust level among the investors and the capital market, these type of scandals impact at huge level on the capital markets which lead the investors towards the divestment from the market and the financial position of the businesses led down (Dent and Whitehead, 2013). Though, the recent strictness of CFA and other new rules have motivated the professionals to follow the ethical approach in the industry to maintain the overall performance. A current research report brief that the 61% people started trusting in the reports and statements of professional fund managers and they believe that the reports have been prepared through following the ethical approaches (Fund Europe, 2018).
Investment Analysis and Portfolio Management 12 Recommendation and conclusion: To recommend the investors about the performance and the investment among both the companies, various aspects of the business has been evaluated such as the strategically performance, changes into the financial operations and performance, impact of external; factors on the economical position etc. The report on the A2 Milk Company limited and JB HI FI explains that the financial position of both the companies is quite attractive. Both the companies would offer great return to the shareholders. Further, the non financial performance of the business i.e. strategic analysis leads to the conclusion that better strategies have been maintained by the companies to reduce the threat level. As well as, the economical performance of the industry has been measured after the trade war and found that the companies would not be affected at huge level because of the trade war. Thus, the investors are recommended to invest into both the companies and hold the stock for short term and long term to get higher return.
Investment Analysis and Portfolio Management 13 References: Ackert, L. and Deaves, R. 2009.Behavioral Finance: Psychology, Decision-Making, and Markets. Cengage Learning. Bhimani, A., Horngren, C. T., Datar, S. M., and Foster, G. 2008.Management and cost accounting(Vol. 1). Pearson Education. CNBC. 2018.Trade war impact.[online]. Available at: https://www.cnbc.com/2018/04/11/anz-ceo-shayne-elliott-on-potential-impacts-of-a-trade- war.html(accessed 4/9/18). Dent, M. and Whitehead, S. 2013.Managing professional identities: Knowledge, performativities and the'new'professional(Vol. 19). Routledge. Funds Europe. 2018.Fund management rules. [online]. Available at:http://www.funds- europe.com/march-2016/17822-ethics-in-fund-management-there-s-more-to-good-behaviour- than-rules(accessed 4/9/18). Garrison, R. H., Noreen, E. W., Brewer, P. C., and McGowan, A. 2010. Managerial accounting.Issues in Accounting Education,25(4), 792-793. Hansen, D. R., Mowen, M. M., and Madison, T. 2010. Cornerstones of cost accounting.Issues in Accounting Education,25(4), 790-791. Horngren, C. T. 2009.Cost accounting: A managerial emphasis, 13/e. Pearson Education India. Jiashu, G., 2009. Study on Fair Value Accounting——on the essential characteristics of financial accounting [J].Accounting Research,5, p.003. Kaplan, R.S. and Atkinson, A.A., 2015.Advanced management accounting. PHI Learning. Kinsky, R. 2011.Charting Made Simple: A Beginner's Guide to Technical Analysis. John Wiley and Sons. Reuters. 2018.Trade war would damage Australia's economy - c.bank governor.[online]. Available at:https://www.reuters.com/article/australia-economy-rba/trade-war-would- damage-australias-economy-c-bank-governor-idUSS9N1QG00B(accessed 4/9/18).
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Investment Analysis and Portfolio Management 14 SMH. 2018.Trade war of australia. [online]. Available at: https://www.smh.com.au/business/markets/how-trade-war-with-us-can-hurt-china-and- economies-including-australia-20180706-p4zpv2.html(accessed 4/9/18). Stewart, S.D., Piros, C.D. and Heisler, J., 2011.Running money: Professional portfolio management. McGraw-Hill Irwin. Yahoo Finance. 2018.A2 milk company limited. [online]. Available at: https://au.finance.yahoo.com/quote/A2M.AX/(accessed 4/9/18). Yahoo Finance. 2018.JB HI FI. [online]. Available at: https://finance.yahoo.com/quote/JBH.AX/history?p=JBH.AX(accessed 4/9/18).
Investment Analysis and Portfolio Management 15 Appendix: Ratio Calculations201620172018 A2M Limited Profitability Ratios:201620172018 Return on assets Net profit /29,01786,330179,477 Total Assets200,355327,552662,733 Answer:%14.48%26.36%27.08% Return on equity Net profit /29,01786,330179,477 Total equity126,874229,983509,684 Answer:22.9%37.5%35.2% Gross profit margin Gross profit /143966250970425891 Sales Revenue336068523092845963 Answer:42.8%48.0%50.3% A2M Limited Asset Efficiency Ratios201620172018 Inventory Turnover (days) Average Inventory /50,10627,08358,792 Cost of Sales # days192,102272,123420,072 Answer:(note the above needs to be x 365)95.2036.3351.08 Receivables Turnover (days) Average trade debtors / 42,63 5 65,54 1 54,88 0 Sales revenue(note used operating revenue) # days 336,06 8 523,09 2 845,96 3 Answer:(note the above needs to be x 365)46.3145.7323.68 A2M Limited Liquidity Ratios201620172018
Investment Analysis and Portfolio Management 16 Current Ratio Current Assets /173,918245,989464,149 Current liabilities73,22797,474152,939 Answer:2.382.523.03 Quick ratio Current Assets - Inventory /123,812218,906405,357 Current Liabilities73,22797,474152,939 Answer:1.692.252.65 A2M Limited Financial Gearing201620172018 Debt to asset ratio Total debt25495110 Total assets200,355327,552662,733 Answer:0.0010.0000.000 Asset turnover Net sales /336,068523,092845,963 Average fixed assets26,43681,564198,584 Answer:12.7136.4134.260 A2M Limited Investment and market ratios201620172018 Earnings per share Net income /29,01786,330179,477 Weighjted average shares686,870716,047724,685 Answer: 0.04 2 0.12 1 0.24 8 Price earnings ratio Share price /11.5810.7911.61 Earnings per share0.040.120.25 Answer: 274. 1 89.49 6 46.87 8 Ratio Calculations201620172018
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Investment Analysis and Portfolio Management 17 JB HI FI Profitability Ratios:201620172018 Return on assets Net profit /152,181172,400233,200 Total Assets992,3812,452,3002,491,700 Answer:%15.33%7.03%9.36% Return on equity Net profit /152,181172,400233,200 Total equity404,702853,500947,600 Answer:37.6%20.2%24.6% Gross profit margin Gross profit /86540812305001470200 Sales Revenue395446756280006854300 Answer:21.9%21.9%21.4% JB HI FI Asset Efficiency Ratios201620172018 Inventory Turnover (days) Average Inventory /546,437859,900891,100 Cost of Sales # days3,089,0594,397,5005,384,100 Answer:(note the above needs to be x 365)64.5771.3760.41 Receivables Turnover (days) Average trade debtors / 98,07 3 196,60 0 204,70 0 Sales revenue(note used operating revenue) # days 3,954,46 7 5,628,00 0 6,854,30 0 Answer:(note the above needs to be x 365)9.0512.7510.90 JB HI FI Liquidity Ratios201620172018 Current Ratio Current Assets /702,5181,170,7001,210,500 Current liabilities446,833885,800917,200
Investment Analysis and Portfolio Management 18 Answer:1.571.321.32 Quick ratio Current Assets - Inventory /156,081310,800319,400 Current Liabilities446,833885,800917,200 Answer:0.350.350.35 JB HI FI Financial Gearing201620172018 Debt to asset ratio Total debt140,846713,000626,900 Total assets992,3812,452,3002,491,700 Answer:0.1420.2910.252 Asset turnover Net sales /3,954,4675,628,0006,854,300 Average fixed assets289,8631,281,6001,281,200 Answer:13.6434.3915.350 JB HI FI Investment and market ratios201620172018 Earnings per share Net income /152,181172,400233,200 Weighjted average shares100,187111,700114,800 Answer: 1.51 9 1.54 3 2.03 1 Price earnings ratio Share price /27.9528.9529.95 Earnings per share19.6321.8722.37 Answer: 1.42 4 1.32 4 1.33 9